June 18, 2009
Author: Elaine Enfonde, Carolyn S. Kaplan and Richard A. Marx
Organization: Nixon Peabody LLP
As green building standards evolve and are incorporated into everything from regulatory requirements to lender criteria to tax credits, project proponents must keep current on standards and protocols and ensure proper documentation of expectations and understandings. This Alert summarizes upcoming changes to the LEED® Green Building Rating System, the most widely accepted national standard, and describes some of the legal issues that can arise when building green.
The most widely recognized measure for defining a “green building” is the Leadership in Energy and Environmental Design (LEED) certification, developed by the U.S. Green Building Council (USGBC). On April 27, 2009, USGBC is expected to launch its next version of LEED: LEED Version 3 (v3) or LEED 2009.
The USGBC is a nonprofit organization with leaders from every sector of the building industry, including builders, architects, academics, engineers, and attorneys. USGBC established the LEED Green Building Rating System—a voluntary, consensus-based standard—to support and certify successful design, construction, and operation of high-performance green buildings. The standards cover a variety of commercial and institutional building applications, including new construction, existing buildings (operation and maintenance), commercial interiors, core and shell projects, and schools. Additional rating systems are under development for retail and health care.
The LEED Green Building Rating System is a point-based system that covers key categories, including sustainable sites, water efficiency, energy and atmosphere, materials and resources, indoor environmental quality, and the innovation and design process. Depending on the number of points they accrue, buildings can achieve different levels of certification, including LEED certification, and silver, gold, and platinum achievement levels.
There are three main components of LEED v3:
- LEED 2009, the new version of the LEED Green Building Rating System
- A “more user-friendly, reliable and faster” LEED Online, the tool LEED project teams use to manage the LEED registration and certification processes
- An expanded building certification infrastructure based on ISO standards and administered by the Green Building Certification Institute (an independent nonprofit organization) and 10 new certification bodies
Changes in LEED 2009 ensure that credits and prerequisites are consistent across all rating systems. LEED 2009 will operate on a 100-point scale, and credits will now have different weightings depending on their relative ability to affect environmental and human health concerns. Under the new system, more points will be awarded for strategies that affect energy efficiency and CO2 reductions. For example, the proximity of a building to public transportation, implementation of water reduction measures, and use of renewable energy for a building’s energy needs all will receive greater credit under the new system. Additional credits can be earned by addressing issues of environmental significance to the particular region in which the building is located.
New projects will have 60 days (until June 26) after the April 27 launch of the new rating system to register under a version 2 rating system or LEED 2009; after this grace period, LEED v3 will apply to all new projects. LEED projects registered under previous versions of the rating system can be “upgraded” to LEED v3 after April 27, or they can continue using the version of LEED under which they originally registered. Currently registered projects will have 180 days from the April 27 launch of LEED v3 (until October 24) to transition without paying a new registration fee.
Legal issues arising from green building
Today, a number of government agencies are mandating green construction, requiring mitigation of greenhouse gas emissions from proposed projects, and offering tax credit and/or incentive programs to buildings that incorporate sustainable elements. Lenders and investors are requiring that project proponents meet green standards, and Requests for Proposals often include green criteria. Increasingly, these types of requirements and incentives specifically use LEED certification as a benchmark for high-performance green buildings. Although several other sustainable-building standards and rating systems exist, LEED has become the most widely accepted national standard.
Adding this new green element to the traditional design, construction, and approval process poses a new and unique set of challenges. The intricacies of tax credit and other incentive programs, the escalation of green building regulation, and the proliferation of new and often untested green technologies have created a number of new legal issues to be considered by owners and developers. Whether LEED or other recognized criteria are in use, counsel can play an important role in assisting their clients to meet obligations, allocate responsibility, and minimize risk. Some examples follow:
- Ensuring building conformity to applicable design criteria: Counsel can assist developers and owners to articulate contractual responsibilities for important green features and overall green designations, mitigate risk by clearly setting forth responsibility for corrective action, provide mechanisms for calculating damages, address postconstruction obligations, and obtain proper insurance. Appropriate documentation must be negotiated at all levels of the process. Representations and warranties will need to be crafted to backstop traditional design and construction warranties without becoming overly broad, and possibly unenforceable.
- Timing of building sequence: Green building and brownfields tax credits often require the taxpayer to file returns in a particular locality, and triggering events (such as when the building is deemed to have been put in service) occur in specific tax years or when certain certifications are issued. Federal renewable energy tax credits similarly have important timelines with no grace periods. Counsel should carefully manage an integrated design process to ensure that all the moving parts are coordinated to avoid unpleasant surprises associated with ineligible costs or rejected tax credits.
- Negotiating design and construction agreements to achieve green objectives: Green projects can alter conventional understandings about what constitutes a design defect that may be covered by the architect/engineer’s professional liability insurance. Such projects can also alter understandings about what constitutes a construction defect that may be subject to the contractor’s warranty. The November 5, 2007, edition of the AIA owner-architect agreement, for example, requires the architect to “consider environmentally responsible design alternatives” in developing its schematic design based on the owner’s program (Section 188.8.131.52 of the new B101). Equipment being incorporated into the building design may require licenses or postconstruction maintenance, or pose challenges for integration into other building systems. In light of these and other issues, careful attention must be given to secure recourse, adequate insurance, performance bonds, and warranties, and to incorporating appropriate provisions into contracts and other relevant documents.
- Avoiding inadvertent warranties and securing desired warranties: Statements relating to green building or equipment performance can trigger real or perceived guarantees and warranties. For example, green building has led to “performance contracting,” which is a method for implementing energy efficiency by allowing money saved with new technologies to offset the cost of purchasing, installing, and operating the technology. A typical performance contract for a high-rise building retrofit might provide for a level of guaranteed energy savings that will pay for itself over a specified period of time. The building owner fronts the cost of design, equipment purchase, and retrofit construction, and then pays itself back out of the guaranteed energy savings. Some performance contractors will offer to front the design and construction costs in return for a financing charge, in effect loaning the owner the funds to pay for the retrofit. How such guaranteed energy savings are secured, possibly by using letters of credit and performance bonds, is an area that requires special experience in those types of performance securities.
An experienced and creative legal and technical team can help a company secure substantial tax, financial, and energy/conservation benefits to help guide the owner/developer through a smooth and efficient construction process, ensure an adequate return on investment, and help avoid surprises or project delays.
- LEED® is a registered trademark of the U.S. Green Building Council.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.